When you work a normal 9-to-5 job and receive a regular weekly/bi-weekly/monthly paycheck from your employer, it's easy to determine your income. But self-employed individuals don't get paid the same. And lenders want to see proof of income when deciding whether or not to approve you for a mortgage on a San Antonio home. Self-employed home buyers might benefit from knowing exactly what a bank looks at when determining your income qualifications.
What Lenders Want to See from Self-Employed Home Buyers
Just like any other applicant, banks want to see a two-year income history. While other buyers may present banks with their W-2's, it's not that simple for self-employed home buyers. For one thing, instead of W-2's, self-employed business people receive 1099's from their clients. Lenders will want to see at least the last two years of tax returns to prove your income. You need to sign a 4506-T form as well. This allows the lender to request a copy of the last two years of returns directly from the IRS. When they receive those, they'll compare what the IRS sends them to what you present to them. Any discrepancies could nullify your loan request.
In addition to your tax returns, the bank wants to see a year-to-date profit and loss statement (P&L). They use all of this information together to determine your qualifying income. After they add up the two years of stated income on your tax returns and combine it with the year-to-date P&L, the average becomes your qualifying income for the purposes of your new loan.
Lenders understand that self-employed home buyers may not receive a regular income like other buyers. But, they do want to see some kind of stable income. If you made $85,000 two years ago and increased that to $95,000 last year, that indicates a steady growth as far as the lender is concerned. However, if you made $95,000 two years ago and show just $85,000 for last year, that throws up a red flag to the lender that your business may not be doing so well. If your current P&L statement continues that downward trend, your loan approval might be in jeopardy.
In the end, the lender makes a judgment call about your creditworthiness and financial stability. If you're unsure whether you'd qualify for a mortgage under your current financial situation, it doesn't hurt to talk to a lender before you start looking at new San Antonio homes. It's better to know where you stand before you find a home that you fall in love with. After all, you don't want to run up against any issues that might slow down the home buying process.
LUX Move Up* by Christine Aldrete Banks, CRS, SRS, RSPS